Microfinance over the last 10 years | Reflections and suggestions for the future

The UK's All Party Parliamentary Group on Microfinance recently celebrated 10 years' of raising awareness of microfinance and the role it can play in reducing poverty. At an event, hosted by CARE International, Dr Ajaz Khan (lendwithcare.org's Microfinance Advisor) reflected on the last 10 years and made some suggestions for the future.

Since the All Party Parliamentary Microfinance Group was started 10 years ago, although I am sure the link is coincidental, microfinance has become much more widespread and received increasing recognition – the United Nations proclaimed 2005 as the year of microcredit, one of the pioneers of modern microfinance Muhammad Yunus and Grameen won the Nobel Peace Prize in 2006 and perhaps the ultimate accolade of all, as my children pointed out, in 2010 microfinance was featured on an episode of The Simpsons.

As it has grown though, microfinance has also come under increasing scrutiny and its benefits questioned. We have had much cause for reflection and, for those of us that come to microfinance from a development background, some soul searching as well. What have we learned from our accumulated experiences and what needs to be done to make microfinance more effective? To begin with, I think there is a lot of agreement on some of the main issues:

Firstly, our experiences have shown that when poor people have access to a range of appropriate financial services – such as secure savings, fairly priced loans, insurance, money transfer, and advice and training provided by institutions possessing a strong social development mission, that is when microfinance is properly provided – poor people can and do improve their lives.

Secondly, despite the fact that microfinance has grown so much (it is now a $7 billion dollar a year business), only a small fraction of the world’s poor have access to financial services - more the 2.5 billion people in developing countries still face financial exclusion. In most low-income countries more than two-thirds of the population have no access to formal financial services, and financial exclusion is highest among the world’s poorest, that is those living on less than $2 a day.

And thirdly, we know that there are limits. Simply increasing the provision of microfinance is not necessarily beneficial and in certain circumstances it might even be harmful. Therefore, given that there is now such a wide range of institutions involved in microfinance with differing objectives, methodologies and products, we need to give far more consideration to the types of microfinance we encourage and support.

Looking forward to the next 10 years, how might the All Party Parliamentary Microfinance Group and those of us who are practitioners and investors best support the development of the microfinance sector? Well, with the ultimate aim of strengthening the ability of microfinance to improve poor people’s lives, might I be bold enough to suggest that there are several areas that merit our collective attention:

• Firstly, for far too long we have equated microfinance with microcredit. We need to encourage a greater focus on other financial services. Indeed, arguably for the very poorest people, basic savings accounts and simple insurance services are generally of far more importance than access to credit. Unless we provide a range of services, we cannot claim to be promoting microfinance in any meaningful sense.
• Secondly, we need to encourage more effective regulation of the microfinance sector. This includes both direct microfinance providers (that is the institutions entrusted with providing loans and taking people’s savings) and also, although it is not often mentioned, microfinance investors – and I refer here to the large microfinance investment funds. Of course, what effective regulation looks like, particularly in countries where state capacity and legal enforcement is often difficult, is less clear, but it could start with very simple steps such as supporting the establishment of credit bureaus to help reduce cases of over-indebtedness.
• Since clients of microfinance tend to be from the most marginalized and vulnerable sectors of the population, it is absolutely imperative that we encourage the design and importantly enforcement of consumer protection policies to safeguard and protect poor people’s money. Initiatives such as the SMART Campaign’s Client Protection Principles are, of course, very welcome. However, the difficulty is not convincing microfinance providers to sign up to such initiatives but ensuring that they actually comply.
• We also need to invest in and expand access to financial literacy. Perhaps we should even support the inclusion of financial education on the national curriculum as has happened in secondary schools in Peru. Perhaps we should also support the production of short films that are shown to potential clients making them aware of the potential pitfalls of microfinance as has very belatedly happened in India. I think with greater financial literacy some of the worrying instances of client over-indebtedness and taking out too many loans for consumption purposes might even have been avoided. More generally, perhaps there should be a movement back to accompanying financial services with a range of training and advice. 
• Having spent my career working directly with dozens of microfinance institutions throughout the world, in practice one of their greatest challenges remains strengthening their human and institutional capacities. Even the most well thought out policies and procedures ultimately depend upon the qualifications, ability and experience of people entrusted to carry them out. Capacity building is absolutely critical, yet it is often not commercially viable, investors should, therefore, be open to providing grants to support the process.
• In many ways, this is an exciting time to be involved in microfinance because technological innovations, such as mobile banking, are reducing the costs of providing financial services to the poor – particularly for those people that are geographically isolated. We should encourage innovation. On a trip to the Philippines last month I was amazed to see borrowers on outlying islands making repayments and even buying things in local shops using their mobile phones.
• Finally, we should encourage better reporting and research into how exactly and to what extent microfinance impacts upon poor people’s lives. We should not assume anything. Not only will this encourage further investment and support, but will demonstrate which institutions and which interventions work best and this in turn would allows us to take more considered investment and policy decisions.

How might we best achieve all this? Well, I think it would be a significant step forward if promoting financial inclusion formed part of the new Millennium Development Goals from 2015 (perhaps a timely reminder since our government is, perhaps even at this very moment, discussing what these goals will look like). Why should financial inclusion rank so highly? Well because the people who make most use of microfinance are small businesses. Small businesses account for almost half of all employment in developing countries, and their growth and development is absolutely vital both to creating jobs and to increasing economic prosperity.

Of course it is extremely important that microfinance reaches more poor people around the world. For it to work best though, it has to be the right sort of microfinance. And in this regard the work of the All Parliamentary Group on microfinance, and in our own humble way, each of us present here, is extremely important in steering the development of microfinance in the right direction. 

By Dr Ajaz Ahmed Khan, Microfinance Advisor at lendwithcare.org

Microinsurance: A safety net for the poor?



© CARE/ Josh Estey



It is becoming widely acknowledged that the provision of financial services to the poor is critical in the fight to alleviate poverty. One such financial service, which has been implemented relatively widely and successfully throughout much of the developing world, is microcredit. However, access to credit alone is not enough to guarantee financial security or stability. After all, microfinance is not just the provision of small loans but the provision of a whole host of financial services and includes microsavings, money transfer and microinsurance as well.

As the recent destruction wreaked on the southern Filipino island of Mindanao reminds us, it is often the poorest groups in our society who are most exposed to risks and without the adequate tools to deal with disaster, the most likely to live perpetually in poverty. One effective tool is microcredit, however as a woman in Zambia explained to Richard Leftley, CEO of MicroEnsure, one tool is not enough: “My life is like this snakes and ladders board (game) … the loans are like ladders, they give me growth. But where are you when disaster strikes?” It is with this in mind that the microfinance community has started to pay a lot of attention to the benefits of microinsurance.

CARE International UK has decades of experience in both microfinance and microinsurance. CARE India, for example, works with Bajaj Allianz to provide comprehensive, affordable insurance policies to over 300,000 people in the state of Tamil Nadu, India. Unlike other microinsurance products sold to poor communities in India, and around the world, Bajaj Allianz – and CARE are offering bespoke, rather than off-the-shelf products, to this vulnerable group of people and the communities themselves are involved in designing the new policies. These policies include a wide variety of cover from death to paying wages during illness.

In addition, CARE has shown that microinsurance does not need to take the shape of formal policies. CARE works with local community groups around the world, helping them organise and finance their own Village Savings and Loans Associations (VSLAs). VSLAs are groups formed by communities that begin by pooling the savings of those involved and ultimately use these savings to make loans to individual members. Last year, CARE helped more than 17 million people improve their household income through village savings and loan associations, access to services and new work related skills. At each meeting, group members pay tiny amounts into an informal social fund, which gets paid out should a member hit hard times – such as covering the costs of funeral and medical bills.

A study conducted on the landscape of microinsurance in the world’s 100 poorest countries discovered that although the world’s poorest were most at risk of financial disruption (whether this is due to illness (including death), property damage (including crop damage/loss) or job loss) they were the least protected against these consequences and that although microinsurance for the world’s poor was growing rapidly, just 1.96% of the potential market were being served. In addition, as Richard Leftley states, this 1.96% is limited to simple credit life protection, which does not always meet the complex needs of a poor household (click here to read Richard Leftley’s paper in full). Health and agricultural microinsurance have been identified as the most pertinent to low-income households, yet these are being dwarfed (particularly agricultural microinsurance) by life protection that is often linked to the provision of microcredit.

© CARE/Josh Estey

However, microinsurance is a new field that is still in its experimental stages and although it is right for the microfinance community to identify a need, we must be careful not to implement it too hastily. Insurance is complex and there are a number of barriers that need to be overcome, not least how it is regulated and who distributes it to the poor, before it can be implemented on a large scale. It is important that microinsurance schemes which set out to aid the poor do just that and do not become too focused on their own expansion in a vast untapped insurance market. The right balance needs to be achieved of creating a good quality product that is affordable. After all bad insurance in the hands of the world’s most vulnerable can only have catastrophic results.

One such way that microinsurance is being delivered trustworthily is through local Microfinance Institutions (MFIs) that are already working with large numbers of low-income households and are often trusted by the individuals and communities they deal with. Lendwithcare’s MFI partner in the Philippines, SEEDFINANCE, is an example of this increasingly common relationship between commercial insurers and MFIs. A year ago SEEDFINANCE started a project called SEADASSURE in partnership with CLIMBS, a leading microinsurance provider in the Philippines, to provide life and non-life (typically property and casualty) insurance coverage to SEEDFINANCE’s clients. Since this project was launched it has provided coverage to 1,138 clients, with a total coverage of 36,525,954.98 Philippine pesos (approximately £540,000).

Microinsurance, like that provided by SEADASSURE, works in a similar way to normal insurance, where clients pay a premium (in the case of microinsurance this will be a low premium to reflect their low incomes) and when/if the client suffers a loss the insurers will compensate him or her a proportion of this loss. So for example, if a farmer’s crop suffers a loss of $100 as a result of flooding, the insurance policy s/he has may cover half of this loss. However, not all MFIs are currently in a position to offer crop insurance and in instances of natural calamities MFIs will often employ their own internal policies to help their clients cope with the effects of disaster. Our MFI partner in Cambodia for example, to deal with the effects of the floods in September last year, suspended any loan delinquency penalties for those who had been affected by the floods and reworked repayment schedules to manageable and realistic ones.     

Like SEADASSURE a number of the microinsurance schemes that are being introduced around the world are still in their infancy and as they start to grow in number and coverage they will need to be monitored closely to make sure that protecting the poor remains their overriding goal. If this goal is achieved then, like microcredit and microsavings, microinsurance can be and will be a powerful safety net for the poor.

By Nancy Thomas, assistant at lendwithcare.org